By Aaron J. Gorovitz, William A. Beckett, James E. Walson, Lowndes, Drosdick, Doster, Kantor & Reed, P.A. (a Meritas Law Firms Worldwide Member)
10. Provide Record Notice to Third Parties of Essential Provisions.
Both landlords and tenants prefer to keep the business terms of the lease to themselves and out of the public record. However, some provisions should be placed of record, giving notice to third parties to protect the interests of both parties to the lease. No landlord should be faced with construction liens as a result of work performed on behalf of a tenant. Most leases not only require the prior written approval of the landlord for any tenant alterations, but the tenant also typically is required to notify its contractors, suppliers and other material men that the landlord's interest in the property cannot be subjected to liens. The lease must also give the landlord the right to record a Memorandum of Lease specifically expressing the prohibition of liens against the landlord's interest. Only by recording such a document will there be absolute protection for the landlord over any subsequently recorded liens. Similarly, if a tenant negotiates an option to purchase, a non-competition restriction or a similar special right, it must be placed of record in order to provide real protection against the rights of third parties.
9. Allocate Risk for Injuries in Common Areas.
In states like Florida, a landlord can be held liable for torts or crimes which occur in a common area depending on the level of control over the area exercised by the landlord. As a result, parties should be mindful when defining which areas are under their respective control. The parties can, of course, further allocate risk through the careful drafting and negotiation of indemnity and insurance provisions. Parties to a lease should be mindful of the liability that each could incur in the event a third party is injured on the property, and should allocate risk accordingly.
8. Consult with the Insurance Carrier.
All leases should be reviewed carefully with the tenant's insurance providers to make sure that the coverage requirements can be satisfied at a reasonable cost. The lease may require insurance "as may be reasonably required by landlord." If so, the tenant should confirm prior to signing precisely what will be required. In other leases, the tenant's coverage will be spelled out in detail, often stating the amount and requirements for comprehensive public liability insurance, business interruption, worker's compensation, and other coverages. The landlord should be named as an additional insured and typically prior notice to the landlord is required before cancellation or amendment. Similarly, many tenants require the landlord to carry liability and casualty insurance. All of these details should be carefully reviewed with the applicable party's carrier.
7. Remember the Lender Today and Tomorrow.
The landlord's mortgage may require that the lender approve any new lease or amendment to an existing lease. In that case the lease will need to be submitted to the lender for its prior written approval before it is signed. The landlord should also consider future refinancing. Lenders expect subordination of the tenants' interests to their mortgage. It is much easier to provide for automatic subordination in a lease than try to obtain subordination concessions from each tenant after a lease has been signed. The lease should include the tenant's acknowledgment that it is automatically subordinate to any current or future mortgage on the landlord's interest, and require the execution of an estoppel certificate upon request in order to satisfy a future lender's requirements.
6. Pay Attention to Acceleration of Rental.
There are few tools for enforcing a lease more powerful than acceleration of rent. Under Florida law, absent such an acceleration clause, if a tenant defaults, the landlord must either wait for each monthly installment of rent to accrue before attempting to collect it, or terminate the lease and thereby waive the right to collect future rental. An acceleration clause allows the landlord to claim all amounts due under the lease through the end of the lease term immediately upon a default, even though those amounts are for future installments. Upon accelerating the rent, a landlord may be required by the lease or by applicable law to its mitigate damages by attempting to relet the premises to a replacement tenant. The leverage created through accelerating rent can justify this additional obligation. Whether as a landlord or a tenant, it is important to note the existence or absence of an acceleration clause. It dramatically shifts the power between the parties in the event of a default.
5. Always Include a Notice and Cure Provision Prior to a Default.
Whether a landlord or a tenant, it is important to include express provisions in a commercial lease regarding notification of a default and providing an opportunity to cure. Most leases require delivery of notice to a tenant prior to the landlord's declaration of a default. It is less common to include provisions requiring a tenant to notify a landlord before declaring a default. As a result, despite having never previously complained in writing, tenants often will assert that a landlord is in default only after the landlord commences litigation. Essentially, the tenant will use an allegation of a landlord default as a defense to the landlord's enforcement of the lease. The best tool to prevent such nuisance allegations by either party is to require that all allegations of default be in writing and require a notice and cure period.
4. In Contentious Lease Enforcement Actions a Non-Waiver and Writing Requirement is Essential.
To prevent either a landlord or a tenant from asserting that a party orally modified the lease or waived a requirement in the lease, leases should include clauses requiring that all modifications of the lease and all waivers be in writing. Otherwise, the parties will be subject to allegations that their course of dealings or ambiguous actions resulted in agreements outside the terms of the written lease. The lease should state that all waivers must be in writing signed by the party waiving the condition and that modifications must be in writing signed by both parties. Absent such a provision, the parties are inviting vexatious defenses in the event of litigation.
3. Include a Catchall Definition of Rent.
Commercial leases usually provide for the payment of rent, common area maintenance charges, taxes, insurance, late fees and various other expenses by a tenant. A well-drafted lease will contain a provision which provides that "all sums due hereunder shall be considered rent or additional rent." The inclusion of a catchall provision eliminates ambiguity as to the demand period associated with different monetary obligations and allows any monetary default to be enforced using the state's rental default statute. Defined terms matter in commercial leases, and should be structured such that ambiguity is removed when it comes to enforcement.
2. Be Clear if the Parties and Business Operations are to Stay the Same.
Landlords often want certainty as to the identities of their tenants and the nature of their business operations. Thus, there is often a prohibition against assignment or subletting of the lease without prior written consent of the landlord. The lease also often includes a provision prohibiting a change in the tenant's specified business operations, prohibiting "going out of business" sales, and providing that abandonment by the tenant or cessation of operations (i.e., "going dark") constitutes a default. This is particularly important if a major anchor tenant will enhance the landlord's ability to attract and keep smaller tenants.
1. The Details Create the Big Picture.
Probably the most critical issue in every commercial lease is paying close attention to detail. The specific terms regarding the lease term, base rent, additional rent, allocation of control, maintenance and repair, responsibility and cost for installation of tenant improvements, deadlines for renewal, and all other business details are essential. A letter of intent or term sheet must be followed carefully to incorporate all provisions in the lease. After the lease is signed, keep a summary of the lease and a tracking system of critical dates. This can make a significant difference in leveraging future negotiations if a deadline is missed. This is obviously not an exhaustive list of every consideration that can arise in a commercial lease transaction. It does, however, give a summary of some of the most important considerations that need to be made by both landlords and tenants, first in successfully negotiating a commercial lease, and subsequently in enforcing one's rights under the lease in the event of a default.
The information in this Top Ten should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or the ACC. This Top Ten is not intended as a definitive statement on the subject addressed. Rather, it is intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.
